Authored By: Ian Stewart and Otis Felder

Ian Stewart

Ian Stewart Partner As co-chair of the firm’s Cannabis Law practice, Ian Stewart leverages his 20 years of legal experience to help clients navigate the challenging new risk management, business practices and insurance landscape presented by the rapidly developing area of Cannabis Law. Ian helps traditional and new organizations prepare for regulatory changes and liability trends whether dealing with product liability risks from cannabis products, new product packaging and labeling laws, professional liability risks inherent in operating a dispensary, obstacles to protecting intellectual property, assisting startups with novel risk management methods, or insurance coverage problems created by conflicting state and federal laws. Wilson Elser Moskowitz Edelman & Dicker LLP, 555 S. Flower Street, Suite 2900, Los Angeles, CA 90071 213.330.8830 (Direct)
213.443.5100 (Main)
213.443.5101 (Fax)
ian.stewart@wilsonelser.com (Email)
http://www.wilsonelser.com/services/154-cannabis_law (Web)

 

Otis Felder

Otis Felder Of Counsel Otis Felder is a former Los Angeles Deputy City Attorney who has substantial trial and appellate experience in defending various matters in state and federal courts. Admitted in Alaska, California, Hawai’i, Oregon and Washington, Otis advises clients in a variety of regulatory environments as well as defends them in administrative and litigation matters. As a former assistant to federal and state elected officials, he also understands the legislative process from an unique perspective and has made proposals and assisted various organizations in proposing regulation affecting Cannabis Law. Otis serves on a number of legal educational boards and publications and is a frequent invited speaker on legal developments. Otis also serves as a Special Master for the Los Angeles Superior Court in protecting privileged information during the execution of search warrants. Wilson Elser Moskowitz Edelman & Dicker LLP, 555 S. Flower Street, Suite 2900, Los Angeles, CA 90071
213.330.8844
 (Direct)
213.443.5100 (Main)
213.443.5101(Fax)otis.felder@wilsonelser.com (Email)
http://www.wilsonelser.com/services/154-cannabis_law (Web)

Contact

B. Otis Felder
Attorney at Law
Wilson Elser Moskowitz Edelman & Dicker LLP
555 S. Flower Street – Suite 2900
Los Angeles, CA 90071-2407

 

Article

Most states have statutory provisions that allow licensed businesses where alcohol is consumed on premises to be held liable for selling or serving alcohol to individuals who cause injury or death as a result of their intoxication. These are generally referred to as “dram shop” statutes, historically referring to a tavern where spirits are sold by a small unit of liquid called a “dram.” “Gram shop” liability refers to a similar liability regime for on-site cannabis use, should states adopt and apply similar rules to marijuana sales, typically made by the gram, that result in an impaired consumer causing injury or death. Such gram shop statutes or regulations have yet to be passed in California, but as discussed herein, those businesses permitted to allow on-site cannabis use may have liability under existing law when their customers cause harm to others.

Even before the recent passage of Proposition 64, the Adult Use of Marijuana Act (AUMA), which legalizes the private use of recreational marijuana in California for adults 21 and over, the Los Angeles City Council voted to submit on the March 7, 2017, ballot the Cannabis Activity Permits and Regulation Initiative to increase the number of marijuana businesses by issuing permits and imposing taxes on sales of marijuana intended for recreational use. While it does not have a dual licensing requirement, which exists under the present medical marijuana scheme, the AUMA allows municipalities to institute their own licensing rules. The LA City Council continues to hold hearings on ways it may permit and regulate cannabis consumption within its city limits, while the state continues to develop regulations for a statewide licensing scheme to go in effect in 2018.

At recent hearings before the LA City Council, some advocates have expressed an interest in having the City permit on-site consumption. At least one retired emergency room physician has expressed an interest in allowing patients to use marijuana at the hospital as part of care. Others assert that for those in government-run housing or on-campus student dorms where medical use is prohibited, permitting on-site consumption at cannabis-selling facilities or other public venues allows use in a controlled, safe environment that would otherwise be unavailable to those needing treatment. On-site consumption also encourages users to avoid general public consumption, which remains illegal under California law.

As for recreational use, music event promoters, lounge entrepreneurs and some restaurateurs have expressed to the City Council interest in allowing on-site consumption at various venues, some proposing that they would replace alcohol if cannabis consumption is permitted. While the City Council undertakes consideration of these various proposals, including whether to require certificates of financial responsibility or insurance for on-site permits, this area presents potential liability considerations for those becoming involved in these new ventures.

Targeting Deep Pockets

As was once said about the Y2K bug, “with millions of dollars being spent, litigation is sure to follow.”

While neither Y2K nor the passage of Prop. 64 caused the systematic end of civilization, billions of dollars are being spent on cannabis. Legal cannabis sales increased 17.4 percent from $4.6 billion in 2014 to $5.4 billion in 2015. California alone is predicted to reach $6.5 billion by 2020, or about one third of the predicted $22 billion in national legal sales for the United States. In line with other emerging industries, those in the marijuana business should be aware of the potential dangers created by their own success.

For establishments allowing on-site use, especially for recreational purposes, the law could impose liability if a customer or patron subsequently injures another person. When a person is injured, a goal of the law is to provide that the innocent person is compensated for the injury and loss. The majority of personal injury cases involve at least two sides: the plaintiff, or person who is injured or their representative, and the defendant, the person or company allegedly causing the injury. In dram shop cases involving alcohol, however, the injured person seeks damages not only from the intoxicated person who directly caused the injury but also from a third party that contributed to causing the loss by negligently supplying or serving the intoxicant.

In past cases involving alcohol, liability was generally established against sellers arising out of their furnishing alcohol to those apparently intoxicated consumers who subsequently caused death or injury.

This type of liability usually depends on a showing that the servers of the alcohol clearly could determine that the customer was intoxicated, and that by continuing to serve alcohol to the impaired person, the server increased the risk of harm to the general public. The policy goal in permitting this type of recovery was to encourage vendors to develop reasonable service criteria and to train their employees to refuse service to a patron when it appeared he or she had too much to drink and could pose a danger to others.

Dram Shop Immunity for California Sellers of Alcohol and Exceptions

Each state has different rules for potential civil liability against vendors that provide alcohol to a person who then injures someone else. Before the imposition of these laws, courts generally found that the link of selling alcohol was too remote to serve as the proximate or legal cause of an injury; rather it was the purchaser’s consumption and subsequent actions that were often found as the sole cause.

Accordingly, before 1971 California courts uniformly held that the consumption of alcoholic beverages, rather than the serving of alcoholic beverages, was the legal cause of injuries resulting from the intoxication of the imbiber. This view was shared by many jurisdictions and sometimes is referred to as the “common law” approach. However, in Vesely v. Sager (1971) 5 Cal.3d 153, 165, the California Supreme Court unanimously rejected this view, concluding that a tavern keeper owed a duty of care to the public based on the Court’s reading of a California statute providing that every person who sold any alcoholic beverage to any obviously intoxicated person was guilty of a misdemeanor. In other words, the statute at issue created a standard of conduct, and violation of it would be considered negligence per se. Five years later, the Court in Bernhard v. Harrah’s Club (1976) 16 Cal. 2d 31, extended liability against vendors based on common law negligence principles rather than a violation of any particular statute.

In 1978, the Court again extended the duty of care to noncommercial suppliers of alcohol. In that case, which was brought against social hosts, the Court explained that the “danger of ultimate harm is as equally foreseeable to the reasonably perceptive host as to the bartender. The danger and risk to the potential victim on the highway is equally as great, regardless of the source of the liquor.” See Coulter v. Superior Court (1978) 21 Cal.3d 144, 153.

Less than five months after Coulter was decided by the California Supreme Court, the California Legislature adopted laws that reversed the judicial extension of civil liability for the furnishing of alcohol.

See California Business and Professional Code §§25602, 25602.1, 25602.2 and 25602.3 and California Civil Code §1714, subdivisions (b) and (c). While bars, restaurants and others that furnish alcohol could still face criminal charges and consequences to their liquor licenses, these statutes were designed to legislatively overrule the court holdings allowing third parties to sue for damages.

In essence, the statutes created civil immunity for furnishers of alcohol in most situations involving the on-site sale and consumption of alcohol where those furnishing the alcohol had some control and could take steps to refuse to supply the consumer. The only statutory exception is to licensed sellers that provide alcohol to obviously intoxicated minors.

 

Following the return to the common law view that existed before Vesely, various judicial decisions have created several exceptions. One exception exists where the defendant did not “furnish” the beverage, such as a manufacturer that does not exercise control over the actual alcohol consumption by the consumer.

Another is where the plaintiff who is injured can prove the drinker had an exceptional mental or physical condition of which the defendant was aware and knew or should have known the adverse effect it would have on the drinker. A third recognized exception is where the person drinking also is an employee and causes injury to another; in these cases, liability is created when the employee’s consumption of alcohol is within the scope of employment.

California courts have identified other limitations on the common law rule where reckless behavior is involved. For example, the service of alcohol to such an extent as to cause alcohol poisoning may be considered as willful misconduct by a bartender. Such action would not fall within the scope of the holdings of Vesely and the subsequent legislative abrogation, as the conduct alleged there only involved negligence. Likewise, furnishing alcohol to a guest and entrusting him or her with a vehicle is not protected by the statutes. These situations and others concerning the common law rule of non-liability suggest courts may be willing to permit recovery in certain circumstances.

Most importantly, the “immunity” created by California dram shop statutes presently extends only to those furnishing alcohol, not marijuana. With the anticipated profits being generated from this new industry, there is a good chance that the Legislature will likewise reform potential gram shop liability, but this may ultimately depend on the success of the lobbying efforts of the industry.

California’s Drug Liability Law

Whether courts permit a “gram shop” action against a business that provides a place to consume cannabis may depend on the interpretation of the status of the common law. Even so, it also should be noted that plaintiffs who seek recovery may request courts to consider California’s laws with respect to imposing civil liability where there is a connection to some illegal use. While Prop. 64 decriminalizes use by adults over 21, it does not by itself annul other existing laws that may apply.

For example, following the death of actor Carroll O’Connor’s son caused by a drug-related suicide, California passed into law the Drug Dealer Liability Act ( California Health and Safety Code §11700, et seq.) enabling persons injured as a consequence of the use of an “illegal controlled substance” to recover damages from persons who knowingly participated in their marketing and to shift the cost of damages “to those who illegally profit from that market.” The Act does not impose liability for negligent conduct.

The Act applies to a variety of substances, defining “illegal controlled substance” to include cocaine, phencyclidine, heroin, or methamphetamine and any other illegal controlled substance where it would violate §§11358 (illegal cultivation of marijuana for sale), 11359 (possessing marijuana with intent to sell without a license) or 11360 (selling or giving away marijuana without a state license and local required licenses). While other states have passed similar laws, one of which has been held to be unconstitutional, the potential use of this or similar types of laws may create a mechanism for civil liability.

Suing for On-Site Use Resulting in Injury

Many now fear that a business allowing on-site marijuana use may be held liable to third parties injured by their customers. One important rationale for liability based on dram shop−type principles is the prevention of traffic injuries and deaths due to impaired driving. This may also apply to cannabis consumption, even where the scientific community has not yet concluded whether cannabis-influenced drivers have the same level of impairment as those under the influence of alcohol, or the duration of any such impairment.

In addition to safer driving, imposition of civil liability may depend on consideration of which type of plaintiff should be able to recover from those furnishing marijuana, how the liability should be apportioned between the commercial vendor and the customer causing the loss, and whether there is any need to protect commercial vendors that provide marijuana to consumers. Some have argued that, like a bartender, those providing service to on-site users would have no duty to correct a potentially dangerous situation but would face liability only if he or she made the situation worse by selling or furnishing more marijuana to an obviously impaired patron. Using the “reasonable person” standard could permit a case by case assessment of whether the vendor knew or should have known that the customer posed a risk, and that the vendor should have denied service. This approach is likely to be affected by local views on consumption until a standard is reached through the appellate process.

As courts have recognized the foreseeability of potential harm caused by alcohol sales to an already intoxicated person as a proximate cause of injury, they may apply the same standard to marijuana.

Whether the California Legislature acts to protect marijuana sellers as it did to protect those providing alcohol remains uncertain, and the politics behind it is just as difficult to predict. While the general public has seemingly found that decriminalization is appropriate, this new public acceptance has not yet translated to statutory or tort protections available to a civil defendant in a case involving the sale or supply of cannabis to a customer.

 

Protecting Against Potential Loss

All businesses want to avoid the significant expense of such lawsuits, but as the cannabis industry continues to develop, lawsuits against industry participants are becoming more prevalent. So far, the majority of cases involve disputes over denial of licensing, profit sharing and other general commercial issues.

Regardless of the type of case brought, litigation is expensive. One study by the Small Business Administration (SBA) found that an average civil case can cost $50,000 to $100,000 to get through trial. Without insurance, the amount of money involved could force a business to convert assets, incur debt or even close its doors.

Small business owners are kept busy managing and operating their businesses, and marijuana business owners are particularly involved due to the unique characteristics of this emerging market. When a lawsuit is served, time is taken away from the business for researching, providing documentation, communicating with lawyers and contemplating the impact of the case on the bottom line. Up-front thought and planning can help avoid a suit or at least lessen the financial impact.

Liquor Legal Insurance, sometimes called Host Liquor Legal Liability Insurance, for those who provide or permit alcohol consumption but do not sell it is available to protect those licensed to serve alcohol. In some instances, states or localities will set the amount of coverage a business furnishing alcohol must carry. The premium is often based on receipts. Many businesses assume their general liability (GL) policies cover alcohol-related incidents, but that is not always the case, and they should purchase this coverage. While Liquor Liability can be packaged with a GL policy, standard policies usually exclude alcohol-related events.

With the potential development of on-site use, those considering this business venture should not only inquire as to insurance coverage but also seriously consider, as those serving alcohol have done, the development of standards and procedures involving consumption to avoid litigation, such as:

• Limiting on-site consumption to one gram per customer

• Obtaining agreement from on-site consumers to use car/taxi companies or public transportation as a condition of sale

• Posting in a prominent place warnings about potential impairment.

 

These and other measures showing advocacy for reasonable use may be factors considered in showing that a vendor took a responsible approach. At this stage in the development of regulations legalizing recreational use, much remains uncertain. Attempts to minimize liability and risk should be a part of the business planning for those seeking to be in this area for the long run.